The Pivot in U.S.-China Trade Policy May Herald Long‑Term Tension
In any trade negotiation, the last few innings are usually the most fragile since that is when more difficult issues are addressed, and the U.S.–China negotiations in early May are certainly proof. We had shared in the growing optimism that a deal would be secured given the political appetite on both sides, although we did note the inherent fragility of late-stage negotiations. Even with that caveat, however, the hardline pivot over the week of 6 May and the U.S. decision on 10 May to increase tariff rates on Chinese goods have taken virtually everyone by surprise, including us.
Now that U.S. tariffs have increased to 25% on $250 billion of Chinese goods, there is a real possibility that tensions between the U.S. and China could continue, if not escalate.
China on Monday responded with its own tariffs on $60 billion worth of U.S. goods. Beginning on 1 June, China will raise to as high as 25% tariffs on products currently taxed at 5% to 10%.
We understand that U.S. Trade Representative Robert Lighthizer is working on a list that is likely to include proposed tariffs on some or all of the $300 billion of Chinese products that are not currently subject to any U.S. tariffs. Similar to previous tariff rounds, this list would be subject to a notice and public comment period, as well as hearings to gain public input, meaning the earliest we could see any additional tariffs – if the Trump administration decides to move forward – is early July.
Barring a trade deal by the G20 summit in June, which could come together if President Donald Trump pivots again or China makes significant concessions, we see the recent jingoistic rhetoric as inhospitable to a deal, thereby increasing the possibility that Trump will move forward with these additional tariffs and escalate tensions.
Why the sudden return to tariff talk? For one thing, Trump believes that tariffs work not only in increasing leverage over negotiating partners, but also, in his view, in raising revenue for the U.S. government. (Many would argue that the revenue is not entirely collected from China, however.)
Additionally, and importantly, years of negotiating with China have left bipartisan scars in Washington. U.S. negotiators feel that many previous negotiations have played out in a similar fashion: lots of talk, promises of concessions, and perceived advancement, followed by equivocation and backpedaling when the time actually came for China to deliver. While other administrations have pursued a more patient approach, Trump (and many other policymakers in Washington) seems to have little tolerance for this now and is willing to take a more direct approach.